Chapter 06 - Process Costing
A company that should use a process costing system typically has homogenous
products, which pass through a series of similar processes or departments.
These firms usually engage in continuous mass production of a few products.
Process costing is likely used in industries such as chemicals, oil refining, textiles,
paints, flour, canneries, rubber, steel, glass, food processing, mining, automobile
production lines, electronics, plastics, drugs, paper, lumber, leather goods, metal
products, sporting goods, cement, and watches.
Differences between job and process costing:
(1) accumulating costs by job versus
department, (2) collecting cost data using the job cost sheet vs. the production
cost report, and (3) computing unit cost by job vs. department.
Equivalent units are the number of completed units that could have been produced
given the amount of work actually performed on both complete and partially
If direct materials are added at the beginning of the process rather than uniformly
throughout the process, we do not need to add any equivalent units of direct
materials to finish the work-in-process beginning inventory
A production cost report is a report, which summarizes the physical units and
equivalent units of a department, the costs incurred during the period, and costs
assigned to both finished goods and work-in-process inventories.
The five key
steps in preparing a production cost report are analysis of physical units,
calculation of equivalent units, determination of total costs to account for,
computation of unit costs, and assignment of total costs.
The weighted-average method equivalent units include both the units placed into
production in the current period and the units from the prior period that are still in
production at the beginning of this period.
FIFO method does not include the
equivalent units of the prior period that are still in production at the beginning of
Equivalent units under the weighted-average method are larger than
those under the FIFO method. They are equal only if there is no beginning work-
The weighted-average method would be inappropriate when a firm’s beginning and
ending inventories or manufacturing costs per unit change dramatically from
period to period
The advantage of the weighted-average method is its simplicity